India Pharmaceuticals Road-show Takeaway: Interest is high : Macquarie Research

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India Pharmaceuticals
Road-show Takeaway: Interest is high
Event
 We present key takeaways from our marketing trip to the US and EU
where we met with over 70 investors. Valuation post the recent correction
was now cited as reasonable and investors were looking for ideas to buy.
Defensive characteristics, emerging market exposure and patent
expiries were cited as key reasons to go overweight on the sector.

Impact
 Flight to quality – DRRD & SUNP screened as favourites: SUN's strong
domestic franchise with a focus on chronic therapies, its execution track record,
strong balance sheet and potential synergies with Taro were acknowledged by
investors as key strengths. Key issues raised on the name were the
sustainability of low tax rates and rich valuations. For DRRD strong earnings
momentum driven by niche launches in the US, visible strength in EM, IFRS
reporting, high liquidity and its Bio-generic pipeline were some of the key
positives highlighted. Key concerns on DRRD were any potential regulatory
change in Russia and the potential for further delays in Fonda US approval.
 GNP – value pick: Strong EM market presence with attractive valuation did
create a lot of interest in the name. The ramp-up of US sales will be the key
data point watched by investors near term as the loss of Tarka in the US is
seen as a setback (US$5m/Qtr). Key concerns highlighted were aggressive
guidance, under-delivery in the past and the risk inherently posed by an
innovative R&D model followed by GNP.
 Ranbaxy: High risk, high return – Investors are adopting a wait and watch
strategy on RBXY. An FDA import alert and uncertainty on DoJ investigations
weigh on investors’ sentiments. There is recognition that valuations are
relatively inexpensive if FTF opportunities are included. However, we believe
serious interest in the stock is likely to build only post clarity on FDA issues as
they evolve. The Lipitor launch in 2H11 remains key.
 Niche small cap play – turnaround stories: STR and OCP have niche
product profiles and strong medium-term earnings growth. With the capex
cycle now behind, significant cash flow generation will help bring down
leverage and operating leverage will improve profitability significantly.
 Cipla – margin pressure: Existing margin pressure was acknowledged to
be a concern. Post the recent correction, investors were keen to know if the
worst is now behind. It is seen as a likely acquisition target. Post the
correction we see the potential for further downside on the name as limited.
 Regulatory risk- back in focus: One of the major concerns was the rise in
regulatory risk – import alert on the Aurobindo facility cited as recent example.
Investors find it difficult to account for this inherent risk in pharma stocks.
Outlook
 Company-specific issues continue to dominate the investor outlook. We
believe the key focus areas are – an FDA import alert for RBXY; regulatory
uncertainties in Russia for DRL; synergies with Taro for Sun, a pick-up in
US sales for GNP and USFDA approval for the new facility (Bangalore) for
STR. GNP remains our top pick, DRRD – our preferred large cap pick and
STR & OCP are our small cap plays of choice in India Pharma.